India’s small and medium businesses could soon feel the heat of a brewing global trade war. While US President Donald Trump has temporarily paused his plan to implement reciprocal tariff hikes on Indian goods for 90 days, the long-term implications of this move—especially in the context of a larger tariff war with China—could pose serious threats to India’s already vulnerable MSME (micro, small and medium enterprises) sector.
A new report from India Ratings & Research (Ind-Ra) highlights the precarious position of Indian MSMEs as they attempt to recover from the financial shocks of the COVID-19 pandemic.
According to the report, as many as 23 per cent of MSMEs in India remain financially stressed even before any formal trade war impacts have materialized. The introduction of aggressive tariffs by the US, along with subsequent retaliatory measures by other nations, could significantly exacerbate this situation.
Neermoy Shah, Associate Director for Emerging Corporates at Ind-Ra, points out that most MSMEs face chronic challenges such as limited access to capital and a lack of skilled managerial support.
“Capex intensity remains low as MSMEs are constantly grappling with working capital constraints. These businesses often don’t have a capable second line of management with the skills to negotiate effectively with lenders, suppliers, or buyers,” Shah explained.
What’s especially worrying is the possibility of indirect repercussions from the US-China trade war. If Chinese products are priced out of the US market due to Trump’s tariffs, they are likely to flood more accessible markets like India. This could lead to a significant price drop across sectors, hurting the already thin margins of Indian MSMEs.
Rahul Kamdar, Senior Analyst at Ind-Ra, warns that “Companies at the lower end of the manufacturing spectrum, especially those competing with cheaper imports from countries like China, may suffer severe margin squeezes.”
The ripple effects could be sector-specific too. While some industries—such as textiles and specialty chemicals—might benefit from reduced competition in Western markets, they still face a downside.
Inputs and raw materials for these sectors could become targets for dumping by China or other nations affected by US tariffs, disrupting the supply chain and affecting domestic pricing dynamics.
The research agency further adds that any broad-based demand slowdown, whether domestic or international, would hit MSMEs harder than larger corporations. However, some relief could come from a potential reduction in interest rates and improvements in systemic liquidity, which may offer a cushion to struggling enterprises.
The overarching message from experts is clear: while MSMEs may not be major players in direct exports to the US, they are still deeply intertwined with the global trade ecosystem.
Any disruption caused by tariffs and retaliatory policies could have a cascading impact on their stability, growth, and competitiveness. As the situation unfolds, India’s policy agility and support frameworks for small businesses will be put to the test.
